Monday, January 18, 2010

Fuqi International: Finding Gold In China

Fuqi International (Nasdaq: FUQI) Data as of: 01/15/2010

Industry: Jewelry & Silverware

Current Data

Current Price

$20.73

PEG

0.2

Market Cap ($M)

$572.7

EPS TTM ($)

$2.09

Shares Outstanding (M)

24.9

P/E TTM

9.9X

Institutional Holdings %

46.0%

EPS Estimated 2009 ($)

$2.23

Insider Holdings %

43.0%

P/Estimated EPS

9.3X

Beta

NA

MA Value ($)

$24.50

Latest Quarter Reported

09/30/2009

Dividend Yield %

$0.00

The “Middle Kingdom”, China, is undergoing another, unspoken revolution. There is small, yet growing middle class that is demanding more consumer goods. As China’s economy continues to grow, this population longs for luxury goods.

Fuqi International, Inc. (FUQI) is a designer of precious metal jewelry in China, developing, promoting, and selling a range of products in the Chinese luxury goods market. The Company’s products consist of a range of styles and designs made from gold and other precious metals, such as platinum and Karat gold. FUQI also produces jewelry items that contain diamonds and other precious stones on a custom-order basis. Its design database contains over 30,000 products. The Company operates through wholly owned subsidiary Fuqi International Holdings Co., Ltd. As its wholly owned subsidiary Shenzhen Fuqi Jewelry Co. Ltd. The Company has about 70 jewelry retail outlets and stores in China.

“Fuqi International, Inc. raised its fiscal 2009 outlook and expects revenue of approximately $519.4-$528.4 million. These estimates include both wholesale and retail revenues and exclude the impact from any potential acquisitions and net income of approximately $53.5-$54.9 million, or diluted earnings per share (EPS) of $2.21-$2.27. For fourth quarter of 2009, it expects total revenue between approximately $182.0-$191.0 million, which includes wholesale and retail revenues and net income to be in the range of $15.2-$16.6 million, or $0.55-$0.60 per diluted share. According to Reuters Estimates, analysts were expecting the Company to report revenues of $184.6 million, net profit of $16.3 million and EPS of $0.59 for fourth quarter of 2009 and revenues of $525.4 million, net profit of $47.2 million and EPS of $1.94 for fiscal 2009.”

In a recent press release, the Company reported the following:

FUQI to Exclusively Commercialize, Manufacture, Distribute and Market Popular Chinese Animated Cartoon Jewelry Products

9:01a ET January 8, 2010 (PR NewsWire)

FUQI International, Inc. (Nasdaq: FUQI) today is pleased to announce that the Company has recently launched a new product campaign promoting a series of gold jewelry products based on the popular Chinese animated cartoon figures, "Pleasant Goat and Big Big Wolf." FUQI is the first jewelry company in China to obtain the exclusive rights to commercialize, manufacture, distribute, market and sell "Pleasant Goat and Big Big Wolf" jewelry products in mainland China.

The Company signed an exclusive two year partnership agreement with a subsidiary of Infoport Management, which owns the licensing distribution rights to the "Pleasant Goat and Big Big Wolf" animated series. Under the agreement terms which expire at end of January 2012, FUQI will exclusively manufacture, distribute, market and sell in mainland China new jewelry products such as precious metal coins, bracelets, pendants and rings based on these animated cartoon characters.

By The Numbers

· FUQI has a Price/Earnings ratio of about 10X based on trailing twelve month earnings and an EPS growth rate of 47%. The PEG ratio is a favorable 0.2X.

· The inventory to sales ratio is decreasing.

· The long-term EPS growth rate is 47%.

· The Company’s balance sheet is clean with no long-term debt and a current ratio of 4.3X.

· The net profit margin is a healthy 10.3%; substantially better than the industry median.

On the negative side:

· FUQI has negative free cash flow. The Company cannot finance growth without raising more capital.

· The Price/Book ratio is high at 1.8X.

· Earnings growth weakened in the past year though there are signs of acceleration in the most recent reported quarter and for the quarter ending December 2009.

Conclusions:

We have a short-term price target of $24.50. Longer term, we would insist on positive and growing free cash flow to support expansion and growth.

DISCLOSURE: The author has a long position on FUQI.

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